The Economics of Formalization: Potential Winners and Losers from Formalization in Egypt

Abstract:
This paper contributes to the ongoing debate about formalization in Egypt and makes the case for adopting reforms to integrate the informal sector into the mainstream economy. It first attempts to explain why Egyptian entrepreneurs choose to stay informal, and then assesses the likely welfare impact of formalization on different economic agents using a partial equilibrium model. The paper concludes that under the current regulatory framework, formalization is not socially desirable. However, with reforms, the potential net benefits of formalization are positive and substantial, with gains accruing to entrepreneurs, workers, consumers, and the government. At the level of the economy, formalization would also lead to higher economic growth, poverty alleviation, and an improved business environment.